Auditing Essay: Risks And Legal Liabilities In Business Finance.

Business risk and Inherent Risk Assessment

Discuss about the Auditing for Business Finance Publications.

Auditing refers to the method of verifying the onsite activities of any business such as examination and assessment of a process to ensure the fulfillment of requirements. An audit can be performed in both levels concentrating on the whole organization or to a specific process. Through auditing, organizations aim to maintain a sustainable financial position of the company (Leung, Coram & Cooper, 2012). According to the ISO 199011:2011 Guidelines for auditing management system, an audit is a systematic process for recording statements and information in a proper manner (American Society for Quality, n.d). The assignment intends to identify the inherent risks, legal abilities and adherence of ethical standards associated with the HIH Insurance Limited.

Assessment of Business Risks Related to HIH Insurance Limited

Insurance companies generate funds through money lending, which refers to the money that does not belong to the company, but temporarily enhance the fund (Creedy, 2011). Risk management is the process through which the company identifies, evaluates the risks intrinsic associated with the organization (A.M. Best Methodology, 2013).

HIH Insurance Limited is currently facing problems in maintaining effectiveness of the business. The company was formed by merging two companies, which were CE Health International and a Swiss company, Winterthur Insurance Company. There are several risk factors that can be elaborated in the HIH business in terms of marine, film finance insurance, natural disasters and aviation insurance. Recently, HIH Insurance Limited incurred a heavy loss of $100 million (Buchanan & Arnold, 2003).

The company, acquired by HIH in Sydney, also faced huge loss because of the hailstorm. In addition to this, the company also suffered significant loss due to typhoon in Florida. From this perspective, it is stated that the company has consistently experienced financial downturn due to severe environment or climate. Apart from this, the reason for the failure of the company is considered to be the financial downturn, which in turn poses challenge in retaining a sustainable position in the market. According to the view presented by the Royal Commission, the company has poor management, which is unable to provide future claims. Stating precisely, the unstable management and poor response to the emerging pressure in the insurance market on one hand put a barrier to succeed in the domain, while on the other hand create an opportunity for the rival companies (Parliament of Australia, n.d).

Assessment of Business Risks Related to HIH Insurance Limited

The company has sold its significant assets, which can also be considered as a key reason for the loss suffered. The financial downturn of the HIH insurance limited also had a huge impact on the Australian communities. Besides, the company did not only face loss in terms of financial abilities but also lose the support of human capital, which is a huge loss for surviving in long run. The employees working in the HIH became jobless as well as the shareholders also lost their invested money (¹Australian Government, 2015).

From a different perspective, the customers of the company also faced problems, as HIH failed to continue with the contract holders or policyholders. The impact of the collapse was also evident in the field of sports, wherein the rugby game was cancelled by the Australian Rugby Union, as the injured players were not paid accordingly. The review of the insurance market pricing in 2002 presented by the Australian Competition and Consumer Commission clearly asserted that the downturn of HIH led to increase in the sustaining insurance premium. It was also observed that after the financial downturn of the company, its competitors started to offer higher rates for insurance to their customers (Refer to Figure 1in Appendix) (²Australian Government, 2015). Thus, it can be stated that due to the failure of HIH, its rival companies acquired the opportunity to increase the overall profitability by enhancing the interest rate of insurance.

There are several risk factors evident in the business process of HIH as it also includes certain unethical activities. The company has hidden its original financial position from the shareholders as well as the regulators for several years.

HIH transacted with SGA for worth of A $35 million, which was hidden from its stakeholders (Cooper, 2005). Such activities of the fund transactions may lead the shareholders to take their support from the company in terms of further investment in future. In addition, this kind of situations might lead to reduction in the money generation of the company, thus reducing the financial abilities. Apart from this, the company might lose its goodwill in the market due to such unethical activities in both level domestic as well as the international level. The risks that are associated with the company due to misguiding its potential customers and other stakeholders might cause downturn in the market.

Concerning the future perspective, the company might lose the shareholders and face problem to generate funds. In the recent competitive market, every company concentrates to satisfy the customers and retain the existing stakeholders by providing them better return. In this situation, HIH continuously increases unethical activities, which indirectly creates a barrier to succeed in long run. The stakeholders will further shift their preferences to other rival companies, as they can gain better return. Thus, in this context it can be stated that the company may lose its customers, as the customers will not be willing to get insured from such unethical or lesser profitable company.

Risk Factors Effecting HIH at Financial Report Level

Apart from this, HIH also misstated the operating profit in the annual report of the year 1998-1999 (Cooper, 2005). The misstatement of the profits in the annual report may create the shareholders to invest more due to the misrepresentation of profit. Based on these reports the perception of shareholders become positive towards the company and they further expect more return, which on the other hand enhances the fund and overall financial abilities of the company. However, this enhancement can be considered for short run as after having knowledge on the actual scenario the stakeholders will eventually prefer to shift to other competitors. Stating precisely, if the shareholders failed to get expected return, they might withdraw their investment or support and may charge the company for hiding the true figures of the annual report, which would affect the company in a negative way.

Discussion of Findings from Relevant Court Cases

Several cases can be highlighted regarding the unethical activities of the company or illustrating that it is continuously neglecting its clients or creditors. For instance, the case of Rodney Adler clearly depicted that the company includes false statements and information to attract customers in purchasing HIH shares. It is further evident that to increase the overall profitability, the company pursues its customers with wrong information, which encouraged them to invest in the company shares. In this regard, it is observed that HIH failed to provide accurate information to the clients, thus breaking the ethical values. In this context, it can therefore be asserted that the company does not maintain a transparent or ethical relation with the clients, which Andersen can refer, as failure to complete the responsibilities according to the contracts led to have negative relation with the customers (Gay & Simnett, 2015).

Apart from this, the company has also evident to hide the information about its operation or transaction from the creditors, which clearly represent a negative relation between them. In this regard, the case of Ray Williams can be highlighted, wherein he misrepresented the data in the issue of prospectus by omitting the materials form the prospectus. Through this particular activity the company had hidden around $94.2 million of operating profit from the creditors, while on the other hand this misrepresentation led to reduce the profits of shareholders annually. Thus, it is stated that keeping the information hidden from the shareholder created a barrier between them, as they have the right to obtain knowledge about the investment that has been made by the company (Gay & Simnett, 2015).

Legal Liability

There are several situations evident in the company operations, wherein the clients and the customers can take actions for neglecting their right. The negligence actions can be upheld if the stakeholders find that the company is providing false information regarding any aspect. In this regard, the examples can be taken of Rodney Adler, who broke the ethical law by giving the wrong information to the company, thus by attracting the customers to invest in HIH. In such cases the clients can take legal actions against the individual as well as the company for misinterpreting the information or misguiding them. Concerning the provided case, the creditors or the investors can also implement actions against HIH for hiding the true financial statements and misleading them to invest in the company shares (Gay & Simnett, 2015).

Reasons for Hiring Prior Members

Arthur Andersen provided both auditing as well as non-auditing services to HIH. The close relationship between the Arthur Andersen with the company can be considered as one of the reasons for hiring prior audit members as the external audit team. It is observed from the financial reports that the company has continuously hidden its actual financial information. Thus, acquiring prior members who already have knowledge regarding such unethical activities and support the same will make the deal success and the company can continue accordingly. Based on all these business activities, the financial downturn faced by HIH is considered as the largest corporate failure in Australia (Cheng & Seeger, 2012).

Most of the accounting firms provide bookkeeping, consulting services in addition to the accounting services. The auditing team examines the detailed information provided by the company regarding its business operation, internal activities, human capital, financial record and market position among others. Based on all the information, the team obtains an understanding on the company strengths, weaknesses and future potential as well. Thus, having the same firm for auditing and consulting services has the capability to provide suggestions in developing the performance or profitability of the company along with risk assessment in the competitive market. Apart from this, the auditing team can further provide advices and expertise to manage the operations of business in reducing the burden of taxes, which on the other hand helps in the decision making process (Oringel, 2012).

From the provided case scenario, it is observed that HIH consistently violated the ethical standards, which needs to be followed by an insurance company. The company is unable to maintain transparency within its operation and transaction as well as misled the auditing team (Cooper, 2005). According to the company standard, the stakeholders must have the knowledge regarding the business operation, financial position and future potential of the company annually. Concerning the case of HIH, the shareholders were provided false representation of the financial position and other information based on which is can be stated that the company violated the ethical standards (Waldron, 2005).

Discussion of Findings from Relevant Court Cases

In the recent decades, several companies prefer to include unethical activities to obtain competitive advantages in the market. This, in turn poses a challenge for maintaining a transparent business domain. To mitigate this concern, certain measures can be implemented that are included in the CLERP 9 and the Ramsay report. According to the report, the function of the Financial Reporting Council would be developed for cover up the audit standard. In addition to this, the auditors would be allowed to convene the standard of independence, wherein the non-audit services would be revealed. The company must follow certain restrictions on employment and the financial relationships as well. The external audit team will be changed in every five years and the auditors were also required to be present at the annual meetings of the respective companies. Apart from this, the ASIC would have power to put obligations on the registration of the auditors so that the companies can maintain an ethical and transparent business operation which will help them to succeed in future (Federal Register of Legislation, n.d).

Conclusion

HIH is an insurance company, which was formed by Ray Williams and Michael Payne. Since the establishment of the company, it has concentrated to gain competitive advantages for which it has started to include several unethical activities in the operations. This has resulted as the largest corporate failure in Australia. Lack of proper management and well skilled human capital, the company faced huge financial downturn, which on the other provided a significant opportunity to its rival companies in attracting the potential customers even after increasing the overall interest rates. The chief executive of the company was sentenced for four and half years for misguiding its stakeholders and violating the ethical standards. The company also faced problems in maintaining legal liability, risk assessment and auditing standards as well.

References

American Society for Quality, n.d., What is auditing, Knowledge Center, viewed 19 August 2016, <https://asq.org/learn-about-quality/auditing/>

¹Australian Government, 2015, Aftermath of the HIH collapse, The Treasury, viewed 20 August 2016, <https://www.treasury.gov.au/PublicationsAndMedia/Publications/2015/Economic-Roundup-Issue-1/HTML/article-3/3-Aftermath-of-the-HIH-collapse>

²Australian Government, 2015, The rise and fall of HIH insurance group, Economic Roundup Iss. 1, viewed 20 August 2016, <https://www.treasury.gov.au/PublicationsAndMedia/Publications/2015/Economic-Roundup-Issue-1/HTML/article-3/2-The-rise-and-fall-of-HIH-Insurance-Group>

Buchanan, B. & Arnold, T., 2003, ‘Beware of the ides of March: The demise of HIH insurance’, Finance Faculty Publications, pp. 1-36.

Cheng, S. S. & Seeger, M. W 2012, ‘Lessons learned from organizational crisis: Business ethics and corporate communication’, International Journal of Business and Management, vol. 7, no. 12, pp. 74-86.

Cooper, J 2005, ‘Financial statement fraud corporate crime of the 21st century’, Australian Securities & Investments Commission, pp. 1-16.

Creedy, A 2011, How insurance companies make money: Wisdom from warren Buffett, Home, viewed 20 August 2016, <https://funeralhomeconsulting.org/best-practices/customer-engagement/preneed/how-insurance-companies-make-money-wisdom-from-warren-buffett/#>

Federal Register of Legislation n.d., Corporate law economic reform program (audit reform and corporate disclosure) bill 2003, Home, viewed 20 August 2016, <https://www.legislation.gov.au/Details/C2004B01549/Explanatory%20Memorandum/Text>.

Gay G. & Simnett, R 2015, Auditing and Assurance Services in Australia, Sixth Edition. McGraw-Hill Education Australia, United States of America.

Leung, P., Coram, p. & Cooper, B. J 2012, Modern auditing and assurance services. John Wiley & Sons, China.

Oringel, J 2012, Effective auditing for corporate: Key developments in practice and procedures. A& C Black, UK.

Parliament of Australia, n.d., HIH insurance group collapse, Home, viewed 20 August 2016, <https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/Publications_Archive/archive/hihinsurance>

Waldron, B. D 2005, ‘Ray Williams and Rodney Adler sentenced to gaol’, Company Law & Governance Update, pp. 1-4.